Click here to print:  Construction Contract Payment Remedies

By Arnold L. Wagner

(as published in the Idaho Construction Review and the Idaho Business & Law Magazine, March 2011)

Getting paid for work performed on a construction project is obviously one of the most important issues for all parties involved in each project.  As such, before signing a contract one must review and evaluate the contract.  Pay close attention to provisions relating to progress and final payments, retention, withholding payments for defective work, delays, liens or payment bond claims, suspension of work, and termination of the contract.  All of those provisions can, in one way or another, affect when and how much you may be paid under your contract. 

No less important is the question of the financial ability of the party with whom you are contracting to actually make payment in a timely manner as the work progresses.  Contractors should make an appropriate inquiry into the financial worth of the owner/developer and the provisions for the financing of the project.  Responsibility of the owner/developer and the general contractor are also important questions for subcontractors and suppliers to consider before entering into contracts.

The challenge in the construction industry, especially in these trying times, is to be paid for your work as it is performed.  Delays in receiving payment erode profitability and it can mean disaster if the unpaid amount is large and the delay is long.  If you have not been paid for providing work or materials on a construction job, you may have the right to suspend your performance on the job.  Your right to suspend your performance may be specifically set forth in your contract; if not, your right to stop work will be determined under general contract law principles.  Review your contract carefully to see if it addresses your rights upon nonpayment. 

One typical example of contract language allowing an unpaid contractor to suspend performance for nonpayment is found in section 9.7.1 of AIA Document A201-1997.  This type of provision is helpful to the contractor because it eliminates an element of uncertainty regarding the consequences of nonpayment.  The provision specifically grants the contractor the right to stop work, and gives the owner a reasonable period of time (7 days) within which to cure its nonpayment before the contractor may suspend its performance due to nonpayment. 

Most construction contracts permit withholding all or a portion of progress payments for specific reasons such as uncorrected defective work and delays in performance.  An example of this provision is in section 9.5.1 of AIA Document A201-1997.  Similarly, subcontract agreements typically permit a general contractor to withhold payments from subcontractors to the extent any payment is withheld by the owner for reasons attributable to that subcontractor.

Whether or not a legitimate cause exists for withholding a payment is often a matter of serious dispute between the parties.  In the face of such a dispute, refusing to perform further work under the contract as a means for enforcing payment can be risky.  If cause exists for withholding a payment, then a refusal to continue performance may be a material breach of the contract.

Care should also be taken not to confuse a “stop work” provision with a “termination” provision.  Many contracts contain both and they are intended to address different situations.  A “stop work” provision typically allows the contractor to temporarily suspend performance due to nonpayment, but requires the contractor to return to work after payment, if made within a reasonable period.  A “termination” provision, on the other hand, allows the contractor to permanently refuse further performance upon the occurrence of stated events.  One such stated event may be nonpayment, but a nonpayment giving rise to a right to terminate is usually more serious and longer-lasting than a nonpayment giving rise to a right to temporarily stop work.

If a contractor is going to temporarily cease working on the project because of delayed payment, it is important that the contractor makes it clear that the contractor is suspending work temporarily rather than terminating the contract.  An owner who is unable to make payment to a contractor may attempt to characterize the contractor’s action as an improper termination of the contract.  By doing so, the owner creates an argument that the contractor has breached the contract.

If the contract or subcontract does not specifically allow the contractor to stop work upon nonpayment, the contractor’s right to suspend performance is governed by general contract law principles.  In any event, it is important for contractors to read and understand the provisions in their contract.  An experienced construction attorney can answer any questions about the contractor’s rights.  

 

An award for consequential damages against a contractor can turn a profitable project into a potential for bankruptcy.  Consider this example:  In 1983 a contractor was hired as construction manager on a project to renovate an Atlantic City casino.  The contract stated that the contractor would coordinate with the owner and architect, supervise the trade contractors, and set a guaranteed maximum price for the project in exchange for a fee and expenses. 

Although a great deal of the project was completed on time, construction of the façade designed to attract customers passing by the casino was late.  The owner terminated the contract because of the delay on the façade, and the contractor brought an action for wrongful termination and the balance of the fee.  In turn, the casino sought damages for lost profits and was awarded $14,500,000 in arbitration which was later upheld by the New Jersey Supreme Court.  This scenario demonstrates the impact of a consequential damage award and illustrates the importance of contractually managing these risks. 

The American Institute of Architects' (AIA) form contract language pertaining to consequential damages is contained in the general conditions (AIA A201).  The A201 general conditions adopted a mutual waiver of consequential damages in reaction to the decision referenced above.  The pertinent section reads as follows: 

"The Contractor and Owner waive all claims against each other for all consequential damages arising out of or relating to this Contract. This mutual waiver includes: 

Damages incurred by the Owner for:

o   Rental expenses;

o   For losses of use, income, profit, financing, business and reputation; and

o   For loss of management or employee productivity or of the services of such persons; and

  Damages incurred by the Contractor for

o   Principal office expenses including the compensation of personnel stationed there;

o   For losses of financing, business and reputation; and

o   For loss of profit except anticipated profit arising directly from the Work." 

This mutual waiver is applicable, without limitation, to all consequential damages due to either party's termination.  Nothing contained in this shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents. 

On its face, this language seems to favor contractors because the largest consequential damage claims (like the one referenced above) are those recoverable by owners.  Lost profits may be recoverable by contractors, but typically those losses are not comparatively as large. 

Contractors should also be aware that the A201 mutual waiver of consequential damages language may not preclude owners from recovering consequential damages for construction delays.  Owners may also still recover lost profits, loss of use or other consequential damages as liquidated damages even if the parties agree to the mutual waiver of consequential damages.  The A201 document removes "liquidated damages" from the waiver of "consequential damages." 

In Idaho, two requirements must be met for recovery of liquidated damages: (1) an accurate determination of the actual damages that might be incurred upon breach must be difficult or impossible to determine; and (2) the amount of the liquidated damages must bear a reasonable relationship to the actual damages anticipated to be incurred.  

Liquidated damages are somewhat beneficial to contractors in that they limit the risk resulting from construction delays.  Contractors should discuss what types of costs a liquidated damages provision is intended to cover when negotiating contract terms with an owner and try to limit the recoverable amount to direct damages.  

Additionally, contractors should consider including a liquidated damage provision which applies in the case of owner-caused delays and disruptions.  This way contractors may recover for those overhead, bonding capacity, and onsite costs which continue to be incurred as a project is delayed.  While the drastic results of an award of consequential damages have been addressed by A201.  The parties may still choose to include a liquidated damage provision which attempts to address delay damages. 

Contractors should consider having their legal consultant periodically review their contracts to manage their risk exposure in the contract's liquidated damage provisions and in language pertaining to consequential damages.

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Arnold L. Wagner is a partner with the law firm Meuleman Mollerup LLP, focusing his practice in the areas of complex commercial litigation, contracts and construction law.  Mr. Wagner can be contacted at 208.342.6066 or by emailing This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available at www.lawidaho.com.

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By Arnold L. Wagner

  (Published in the Idaho Business Review, July 2008)

        There are many issues for a contractor to consider when entering into a construction contract.  One of those considerations is whether the contract includes what is known as a “termination for convenience” clause.

        Nearly all construction contracts provide for the owner to terminate a contract if the contractor defaults on its performance in certain defined ways.  Such clauses are referred to as “termination for cause” provisions.  Termination for convenience clauses, however, are intended to provide the owner with the option to terminate the work at any time without regard to the contractor’s performance.  Such a clause generally gives the owner the right to terminate “for any reason or no reason.”  The primary purpose of the clause is to quantify the amount of compensation the contractor is entitled in the event of a termination for convenience and to allow the owner to avoid the duty to pay the contractor the profit that the contractor would have earned on the balance of the contract.  If a contract does not include a termination for convenience provision and the contractor is not in default, the contractor is generally entitled to compensation for work actually performed and profit it would have realized on the uncompleted work.

             A typical termination for convenience clause states:

Owner may at any time and for any reason terminate contractor’s services work at owner’s convenience.  Upon receipt of such notice, contractor shall, unless the notice directs otherwise, immediately discontinue the work and placing of orders for materials, facilities and supplies in connection with the performance of this agreement.

 

Upon such termination, contractor shall be entitled to payment only as follows: (1) the actual cost of the work completed in conformity with this agreement; plus, (2) such other costs actually incurred by contractor as are permitted by the prime contract and approved by owner; (3) plus 15% of the cost of the work referred to in subparagraph (1) above for overhead and profit.  There shall be deducted from such sums as provided in this paragraph the amount of any payments made to contractor prior to the date of the termination of this agreement.  Contractor shall not be entitled to any claim or claim of lien against owner for any additional compensation for damages in event of such termination and payment.

        Most contractors adjust their bidding plans for future projects based upon the amount of work they have under contract.  Obviously, this allows contractors to avoid getting “spread too thin” or not having enough work to pay its employees; all with the goal of maximizing its profit.  An owner’s ability to terminate a contract, particularly on a large project, can have a devastating effect on the contractor.  The contractor, when a termination for convenience clause is in the contract, will not be entitled to the revenue, and associated profit, from the uncompleted portion of the work. 

        If a contractor elects to proceed with a project that includes a termination for convenience provision, the contractor should analyze the payment it is entitled to receive if the contract is terminated.  It is also important that the contractor include a termination for convenience provision in its subcontracts.  Any profit the contractor may have to pay to a subcontractor for terminated work may or may not be costs the contractor is entitled to collect from the owner.  This often depends on the specific language in the owner/contractor termination for convenience clause.

        There are some limitations on the use of a termination for convenience clause.  The primary limitation is that all contracts include an implied covenant of good faith and fair dealing.  Essentially, this covenant prohibits the parties to a contract from acting in bad faith.  Therefore, if an owner terminates the contract in bad faith, the owner may not be entitled to rely on the termination for convenience clause.  Contractors need to be aware, however, that in order to prove bad faith in this scenario, the owner’s actions would generally need to be rare and extreme.

        In this difficult economic climate, it is not unusual to see partially completed projects or projects that never “break ground.”  As such, it is particularly important for contractors to realize whether a contract includes a termination for convenience clause and, if so, the compensation to which it is entitled under such a provision and the effects a termination may have on its business.

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Arnold L. Wagner is a partner of the law firm Meuleman Mollerup LLP, focusing his practice in the areas of complex commercial litigation, contracts and construction law.  Mr. Wagner can be reached at 208.342.6066 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; more information at www.lawidaho.com.

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(Published in the Idaho Business Review, March 2006)

You are an owner, developer or contractor and an unjustified mechanic's lien is recorded against your project. After your temper cools and you realize that you cannot ignore the problem, you will inevitably ask yourself: What can I do?

The first issue to consider is whether to pay the lien. This requires a realistic evaluation of the strengths and weaknesses of the lien. The person asserting the lien will receive attorneys' fees if he is successful in litigation. A person that successfully defends a lien, however, may or may not be entitled to attorneys' fees. This depends on the other claims brought in the lawsuit. In instances where a party does not have a right to attorneys' fees if he prevails, it is not going to be a fair fight - the owner may spend more defending the lien (if it is not large) than he will spend buying his way out of the problem by paying the claimant.

If payment is not acceptable or practical, three choices may be available:

A. Leave the lien in place;
B. Persuade a title insurance company to protect the parties; or
C. File a petition with the court to substitute a bond for the property subject to the lien.

If no sale or financing of the property will occur for six (6) months, simply waiting may be the best solution. The lien will expire unless a lawsuit is filed within six months from the date the lien was recorded. Shortly after the expiration of six months, title will be insurable if no action to foreclose the lien has been filed by the lien claimant. A large percentage of all liens are discharged in this manner.

A second solution, which may be the best if financing or a sale is pending, is to persuade a title insurance company to provide acceptable title insurance notwithstanding the recording of the lien. Typically, the title company will want a cash deposit in an amount of at least 1.5 times the lien amount. The excess covers court costs and attorneys' fees, which are included in the lien if the title company has to ultimately pay it to protect the title to the property. If the lien is relatively small (perhaps less than $10,000.00-$20,000.00), the title company may want substantially more to cover a potential attorneys' fees award.

If you are going to attempt to obtain title insurance, be certain the insurance will be acceptable to your prospective buyer or lender. There are two ways the insurance can be handled.

The first is through a policy that does not show the lien as an exception and, therefore, the policy insures against loss due to foreclosure of the lien. This is the preferable approach and normally will be acceptable to most buyers and lenders. The title company may want to disclose to the buyer and lender that there is a lien and they are insuring it.

The second approach is to include the lien as an exception to coverage, but then include an affirmative statement that the title company insures the buyer or lender against loss due to foreclosure of the lien. This frequently will not be acceptable to a variety of lenders, including lenders who intend to sell the loan.

About ten years ago, the Idaho Legislature added a third potential solution by allowing an owner (or other person with an interest in the property) to provide a surety bond in 1.5 times the amount of the lien. The effect is to completely discharge the lien on the property, and the lien claimant's rights are transferred to payment under the bond. There are some disadvantages to this procedure, including:

A. The cost of obtaining the bond;
B. The bond and petition must be filed in district court and they must be approved by the court at a hearing. This requires a lawyer and the proceeding will take somewhere between 5 and 40 days;
C. It is cheaper for the claimant to proceed against the bond than it is to foreclose the lien and recovery may be more certain;
D. The claimant may have the right to demand a trial within 30) days; and/or
E. The claimant may not be required to proceed with an action within six months from the lien recording.

In any particular situation, any one of the foregoing alternatives may be the way to proceed. Simply waiting six months is the simplest and may be the best solution. From an owner's standpoint, if the general contractor is required to take care of the lien, obtaining a bond is most advantageous because it fully and completely removes the lien from the property. Effectively dealing with a title insurance company is a good compromise and in our experience, it is far more common than a proceeding to file a bond.

Arnold L. Wagner is a partner of Meuleman Mollerup LLP, focusing his practice in the areas of complex commercial litigation, contracts and construction law. Mr. Wagner can be reached at 208.342.6066, or by email This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; more information at www.lawidaho.com.

(Published by Idaho Business Review, January 17, 2005)

While neighboring states may offer attractive business opportunities, many potential legal pitfalls await the unsuspecting contractor who ventures across the Idaho State line to do business. These problems can usually be painlessly avoided if proper steps are taken. This article seeks to provide Idaho contractors with a general overview of several potential issues so they can be armed with the information necessary to take advantage of these opportunities without falling victim to legal entanglements. Some of the relevant statutory provisions of Washington, Oregon, California, Nevada, Utah, Wyoming and Montana will be addressed in this article.

Licensing and Registration Requirements. While Idaho has virtually no licensing or registration requirements for contractors, aside from public works projects, many surrounding states have instituted regulatory schemes requiring either registration or licenses for any contractor wishing to conduct business in the state. The nature of these requirements ranges from somewhat strict to mere formalities in some states, but failure to observe the rules in this area can result in severe penalties no matter what the locality. Utah, California, Oregon and Nevada mandate with few exceptions that anyone engaging in construction in these States must obtain a license from the respective State’s regulatory board. The requirements for obtaining a license and, specifically, who is covered by these requirements vary from state-to-state and contractors are advised to consult the regulations of each state before starting the licensing process. In addition, most states offer various classifications of licenses ranging from general to trade specific, and requirements may vary as well, making consultation of individual state procedures necessary to ensure proper licensure for the job being undertaken.

General Requirements. Most states will require completion of an exam (Oregon also requires completion of a 16-hour education course prior to exam administration), proof of registration with various government agencies, proof of proper insurance coverage, assurance of financial solvency, often in the form of credit reports, disclosure of assets and/or submission of a professionally prepared financial statement, and payment of various application and/or exam fees. California, Oregon and Nevada also require, with certain exceptions, a bond to be posted before issuing a license and California, Utah and Nevada require a showing of a certain amount of work experience in the area in which you are seeking a license. Washington and Montana do not require a license, but have maintained regulatory control at the State level by mandating that contractors register with the respective State’s Department of Labor. Registration is optional in Montana if the contractor or subcontractor does not have employees. It is also important to note that states requiring only registration on private construction jobs will still usually require a license for public works projects.

The timing of obtaining a license or completing the registration process can also be important, depending on a state’s rules. For example, Oregon and Nevada require that contractors be licensed at the time of the bid, while other states, such as California, allow a bid to be submitted without a license, but will not award the bid to a non-licensed contractor. If the contract is awarded and it is later discovered that the contractor failed to get the proper license or register, the penalties are often significant. In addition to imposing disciplinary measures and civil fines, most states (again, subject to some exemptions), will not allow an unlicensed or unregistered contractor to bring a suit in the state court to enforce the contract and collect compensation for completed construction work.

In Wyoming, Utah, Washington and Oregon, it is necessary to note a special requirement when bidding on Department of Transportation projects. Subject to some variations in these States, they require prequalification (in addition to any license and registration requirements) before submitting any bids.

Qualification of the Entity in a State. In every state adjacent to Idaho, and also California, all foreign (out-of-state) contractors must register their business entity with the Secretary of State in order to qualify to do business in that state. This can be accomplished by hiring a company, such as CCH, or a lawyer to complete this task, or simply by filing the necessary paperwork and paying the fee directly to the Secretary of State. Although it is a relatively simple procedure, the consequences for not completing it can be severe in most states, and usually include imposing a civil fine and a restriction on filing any suit in that state’s courts until the requisite paperwork has been filed.

Insurance and Worker’s Compensation. Another essential point when operating out-of-state is making sure that the contractor’s general insurance and worker’s compensation insurance policies are effective in the state in which you are operating. The most effective way to accomplish this is to notify your agent that you will be working in another state and they can provide information regarding policy status in relation to out-of-state operations. This is very important with regard to worker’s compensation because some states might not have the limitations on an employee’s ability to sue the employer for work-related injuries. Also, some states may allow the owner of a project to be held liable for an employee’s injury if the contractor has not maintained effective worker’s compensation insurance.

Sales and Use Taxes. Except for Oregon and Montana, Idaho’s bordering states and California impose state and local sales and use taxes. While the intricacies of these tax schemes are beyond the scope of this article, it is important for contractors to remember that there could be a tax imposed on materials and construction equipment brought into to the state which have been purchased in another state, which is known as a “use tax.”

Contractors working in Washington should also be aware of a tax unique to that State known as the “gross receipts” tax. Almost all businesses operating in Washington, including corporations, LLCs, partnerships and sole proprietors, are subject to the tax. This is a tax on the gross income, making the amount paid to the contractor for both labor and materials taxable by the State of Washington.

Labor Relations. A final issue that any contractor operating out-of-state needs to be aware of is labor relation and union issues. For example, California, Washington, Montana and Nevada have all codified some form of a prevailing wage regulation that requires workers on public works projects to be paid the “prevailing rate,” which is generally defined, with some variations, as the same rate being paid for similar work in similar localities in the state. Certain areas may have a strong union presence and in these areas, contractors should be prepared to deal with union issues even if they do not have an existing labor contract.

These are only some of the possible issues that have become increasingly significant when working in other states, and the advice of a lawyer should be sought regarding the legal implications of specific out-of-state projects.
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Arnold L. Wagner is a partner of Meuleman Mollerup LLP, specializing in complex commercial litigation and construction law. Mr. Wagner can be reached at 208/342-6066 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

PROFESSIONAL RECOGNITION

• 2005 Award Recipient, Idaho Business Review's "Forty Accomplished Under Forty"
• Martindale-Hubbell "AV" Peer Review Rated

AREAS OF EXPERTISE

BUSINESS LITIGATION

• Representing businesses in employment matters, contract litigation, and breach of warranty and defective product litigation
• Representing businesses in significant and contested debt collection
• Representing individuals and businesses in disputes concerning the development of property

CONSTRUCTION LAW / LITIGATION

• Representing sureties, owners, general contractors, subcontractors and suppliers in litigation, negotiations and all types of alternative dispute resolution   
• Drafting and negotiating construction contracts on behalf of owners, general contractors and subcontractors, including cost plus, lump sum and design/build contracts
• Advising owners and contractors during construction projects in an effort to complete successful projects and preserve claims 

PROFESSIONAL EXPERIENCE

2002 - Present:  Partner, Meuleman Mollerup LLP

1997 - 2001:  Associate, Meuleman Mollerup LLP

BUSINESS AND INDUSTRY ACTIVITIES

• Member of the Idaho State Bar, Sections on Litigation and Employment Law
• Member of the American Bar Association, Trial Lawyers Section
• Idaho Associated General Contractors
• Boise Metro Chamber of Commerce

COMMUNITY INVOLVEMENT

• March of Dimes of Idaho, former member, Board of Directors
• Co-Chair, Commercial Real Estate Awards Event, March of Dimes
• Boise State University, Bronco Athletic Association Coach's Club
• Humanitarian Bowl, Chairman's Council
• Idaho Botanical Garden, Board of Directors 2007-2009
• Contributor, Idaho Junior Achievement
• East Boise Youth Baseball and Softball, Board of Directors

REPORTED CASES

In the Supreme Court of the State of Idaho:   Oldcastle Precast, Inc. v. Parktowne Construction, Inc., 142 Idaho 376, 128 P.3d 913, Idaho 2005.

EDUCATION   

• University of Washington School of Law, J.D., 1997
• Western Washington University, B.A., cum laude, 1994

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